A. Field of the Invention
The present invention relates to a computer system and method for modeling and administrating a deferred award instrument plan.
B. Background of the Art
Increased competition among companies has led to the use of stock options as a tool to both recruit and maintain highly skilled labor. Stock options are used as a form of compensation that reward employees for their labor. Employer corporations grant employees the right to purchase stock in the employer at a fixed price. As new products or services are introduced and the stock price rises, the employee""s stock options become more and more valuable. This option, for example, may be given for past service or as incentive for future performance.
When stock options are granted, the price at which the employee has the right to purchase the stock is referred to as the Grant Price. If the options are not exercised in a predetermined period of time, they often lapse. The difference between the Grant Price and the trade price of the stock in the appropriate exchange, (hereinafter xe2x80x9cMarket Pricexe2x80x9d of xe2x80x9cFMVxe2x80x9d) is referred to as the Spread.
There are several different types of stock options that can be granted. Options may be Qualified, commonly referred to as Incentive Stock Options (ISO) that are governed by Sections 422 and 424 of the United States Tax Code. Options may also be Non-Qualified, commonly referred to as Non-Qualified Options (NSO).
There are numerous reasons why it is not desirable to issue too many stock options and/or have them exercised. First, the limited life of most options has cash liquidity ramifications on the employee. The selling of stock to cover stock option costs by key employees can have a negative impact on the company.
A second downside to stock options is taxes. If an NSO is exercised while the employee is alive, the Spread is immediately subject to ordinary income tax. For the stock that is held, the amount of appreciation over the Spread is subject to capital gains taxes when it is ultimately sold. The Spread on the stock that is not held and sold immediately upon exercise of the options is subject to ordinary income tax. Alternative minimum tax is applicable to the Spread of an ISO when it is exercised and capital gains tax is applicable on the difference between the Grant Price and the ultimate sales price of the stock.
If an NSO or ISO is not exercised when the employee is alive, the added burden of estate tax must also be computed. For example, an employee""s family can expect to receive only 12% of the proceeds after taxes on a stock option that has a Market Value that is twice the grant price. The greater number of options awarded the larger the problem becomes. If an employee does not have enough cash to satisfy the Grant Price and taxes associated with an exercise, the employee is forced to sell stock, which only aggravates the tax consequences and reflects poorly on the company.
Many of the issues associated with stock option plans are also present with other deferred compensation programs offered by companies today. Many of these programs also require a significant outlay by the company to compensate or reward an employee. These outlays can detract from a company""s bottom line in the near term. What is therefore needed in the art is a new program, method and apparatus by which a company can compensate its best employees over an extended period, thus minimizing the employees"" tax consequences, while at the same time allowing the company to take maximum tax deductions and recoup many of the costs associated with the administration of these compensation programs.
The present invention is directed to solving the aforesaid problems by providing a unique computer system and computer program for assisting the company""s identification of appropriate employees, through the use of a novel modeling method and apparatus. Another aspect of the invention includes a program that administers a Rabbi Trust unit that permits the employee to benefit from his/her deferred compensation programs, such as stock options and other extended income programs such as life insurance benefits, while having a minimal impact on the company. Further, the present invention includes a system that implements a financial management plan that minimizes tax and maximizes employee benefits, as well as maximizes tax advantages for the company.
Briefly described, the present invention provides an automated Deferred Award Stock Option Plan (DASO(copyright) Plan) that permits employees to benefit from their stock options, or other deferred compensation and income programs, while minimizing the tax consequences and negative impact on the company. The invention also provides a UNIQUE SOLUTION(trademark) Plan (alternatively referred to as a Guaranteed Reduced Estate and Income Tax (GREIT(trademark)) Plan) and a TARGET(trademark) Plan (defined as a GREIT(trademark) Plan for a non-profit/not-for-profit employer, corporation or entity and will also be encompassed hereinafter for simplicity by the term xe2x80x9cUNIQUE SOLUTION(trademark) Planxe2x80x9d), as well as a combination UNIQUE SOLUTION(trademark)/Employee Welfare Benefit (EWB) Plan that additionally allows a company to take maximum advantage of tax deductions and benefits which may be associated with the plans. The present invention comprises a method and system for modeling the programs to determine if the programs are appropriate for a given individual and company, as well as a method of maintaining and operating the individual elements of the invention.
A further object of the present invention is to provide a method and computer system for identifying individuals from a predetermined pool that fit predetermined company goals for inclusion in the DASO(copyright) Plan, UNIQUE SOLUTION(trademark), and the combination UNIQUE SOLUTION(trademark)/EWB Plan.
A further object of the present invention is to provide a method and computer system for the effective and efficient management of a Rabbi Trust designed to implement the DASO(copyright) Plan, UNIQUE SOLUTION(trademark) Plan, and the combination UNIQUE SOLUTION(trademark)/EWB Plan.
The present invention is directed to a method for identifying and administering deferred award instrument plans through a computer system, said method comprising the steps of: identifying at least one participant in said deferred award plan; retrieving financial data related to deferred compensation (such as stock options or other compensation) corresponding to said identified participant and to an employee welfare benefit pursuant to an employee welfare benefit plan for said participant; computing a spread associated with said deferred compensation; establishing a rabbi trust with said spread; determining whether a life insurance policy has been purchased by or on behalf of said participant, said life insurance policy combining features of a deferred compensation plan and an employee welfare benefit plan; determining whether a split dollar agreement has been executed; monitoring and paying at least one premium for said life insurance policy; and notifying said participant that an nth payment associated with said life insurance policy has been paid. After the nth payment has been made, the employee may borrow against the policy with minimal or no tax consequences, in accordance with IRS regulations. When the employee dies, his estate tax may also be reduced as a result of this arrangement.
The present invention is also directed to a method of modeling deferred award instrument plan programs comprising the steps of: inputting models factors; retrieving human resource data; retrieving deferred compensation data and employee welfare benefit data; retrieving fair market value information relating to said data; computing company cost and length of program; and storing said retrieved and computed data. The method may also include converting said human resource data to a deferred award instrument plan format or converting said deferred compensation and/or said employee welfare benefit data to a deferred award instrument plan format.
It is also contemplated that the present invention may include inputting weighing indicators corresponding to said model factors and displaying at least a predetermined portion of said retrieved and stored data based on said weighing indicators.
The present invention is also directed to an apparatus for implementing a deferred award instrument plan comprising: a processor; memory operationally attached to said processor; an input device operationally attached to said processor; a display device operationally attached to said processor; and wherein said memory comprises a deferred award instrument plan program comprising the steps of inputting models factors; retrieving human resource data; retrieving deferred compensation and employee welfare benefit plan data; retrieving fair market value information relating to said data; computing company cost and length of program; and storing said retrieved and computed data.
With these and other objectives, advantages and features of the invention that may become apparent, the nature of the invention may be more clearly understood by reference to the following detailed description of the invention, the appended claims, and to the several drawings attached herein.